Real estate pricing going global

The pricing of core real estate assets and the flow of capital into that asset class had undergone further globalisation, breaking through the regional separation of the past, according to Frontier Advisors.

Following a three-month ‘deep dive’ research trip in the United States and Europe, Frontier’s property team noted core assets were largely priced on the same fundamentals all over the world, while the spread between the yields those assets attracted in different markets had also been narrowing.

“The key observation was that the fundamentals of property are universal,” Frontier Advisors head of property Tim Stringer said in a webcast last week.

“That doesn’t mean there are no differences, for example, there are differences in planning rules.

“But increasingly investors look at the globe as one region.”

Frontier analyst Ari Kraemer pointed out the yields core assets attracted in Australia were similar to those in the Netherlands and investors would make little distinction between the two markets.

“Investors look at a core asset in Australia and they look at a core asset in the Netherlands and they see a core asset, not where it is located,” Kraemer said.

As capital flows are also increasingly global, investors are more likely to explore partnerships and co-investment schemes in the future.

“Co-investments are also being adopted by domestic managers,” Kraemer said.

International real estate has had a good year, with some of the larger US-based property funds posting returns of more than 13 per cent and some of the large pan-European funds returning in excess of 17 per cent over the 12 months to 30 June.

A driver behind the good returns was the recovery in the US, where much capital has flowed into technology-related real estate.

But the sheer wall of money that has been sitting on the sidelines as institutions cleaned up their balance sheets has also added to the momentum.

“A strong driver of recent performance is the weight of capital injected into markets globally and in Australia as well,” Kraemer said.

Stringer argued that was especially noticeable in recent direct property transactions, while funds had been lagging somewhat.

“Currently, property fund discount rates are up to 100 basis points behind the metrics of transactions that are taking place in the market,” he said.

“It will catch up in the next 12 to 18 months and so we are expecting strong returns [from property funds] going forward.”

Stringer was critical of the tendency of some managers to engage in minimal maintenance of their portfolios and urged them to take bolder decisions that would set them up for long-term, risk-adjusted returns.

“What disappoints us is the benign approach of some managers; they are what we call gardening the portfolio, trimming some non-core exposures,” he said.